How to Serve Smaller Businesses for Bigger Profit

Traditional business banking services for larger companies have been a profitability mainstay for many financial institutions, but this typically isn’t the case for the small-business segment.

In this diverse group, the profitability challenges include price sensitivity in general and an aversion to fees overall. All of this occurs in an environment where technology takes center stage and business owners may consume retail (for their personal accounts) as well as business services at a given financial institution.

In spite of these challenges, small businesses (which the Small Business Association defines as businesses with fewer than 500 employees) make up a significant customer segment. Some studies estimate that there are 28 million small businesses in the U.S., representing more than $6 trillion in revenue. Those numbers are sure to grow, as surveys suggest that millennials are more likely to avoid traditional 9-to-5 jobs in favor of being entrepreneurs.

In this environment, how can financial institutions serve small businesses more profitably?

Revenue, while a challenge, is a part of the answer, especially for value-added services beyond payments and balance reporting. Those services can include anything from working capital and other types of loans to additional features such as positive pay. The key is to understand the businesses’ needs in order to upsell and cross-sell effectively through targeted marketing and promotions.

However, revenue is just one part of the equation. Cost and efficiency play even more important parts in contributing to the profitability of serving the business segment. This can come from two areas: the efficiency of the back office in serving all customers (including small businesses), and the efficiency of online banking solutions for small businesses. Let’s look at each of those areas separately.

All financial institutions have constraints on the number of employees they can deploy to support their customers. In order to maximize training and knowledge sharing, the ability to offer a single platform across segments provides a way to simplify and leverage operational support. This is especially true for small businesses, which can grow over time and demand additional business services. A platform that can help a financial institution meet those needs, without requiring the staff to learn a new solution with potential language and process differences, can increase operational efficiency.

Hand in hand with back-office efficiency is a solution’s ability to be easy to learn for businesses themselves. This means an efficient workflow coupled with “business lite” terminology, which will allow businesses to be up and running with their solution as quickly as possible. This approach also allows the solution to be more intuitive, which cuts down on the businesses’ own training (for those who will use the system) and makes usage easier for businesses whose activity is more infrequent.

By focusing on a business banking solution that allows both a revenue upside and an efficiency boost, a financial institution can improve the profitability of its small business segment while providing a road map for future growth. In this scenario, both the financial institution and its customers benefit — and that’s the ultimate goal.

Comments

The threshold of 500 employees to qualify as a “small business” really covers a large portion of most community banks’ customers. By focusing on the points of this article, mainly revenue upside and control of expenses, as well as taking care of the individual needs of the business owners/shareholders/stakeholders banks can take care of their customers while maintaining and increasing profitability – the proverbial win-win.